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Tuesday, December 13, 2016

Merging dreams with acquisitions

Chinese economic developments are of
great interest to everyone. Whether it is growing fast, or undergoing a
slowdown, it impacts the world economy like no other. China has declared
its intention of moving its economy from one based on investment and
exports, to one relying on consumption. They have made it clear that in
the coming years, China will occupy a higher and higher position in
global value chains and become, like the US, Europe or Japan, a producer
of high-end components. The process is now underway and is being
watched with great interest because it has implications for the entire
global economy.
Beyond the macro picture, there are smaller signs of structural
shifts and new trends in the Chinese economy. In the past, China was
often an element in the supply chain, where higher value and high-tech
items came from other suppliers, say, Germany, Taiwan or Japan. The
famous case was that of the iPhone 6 which retailed for $600 in the US
in 2012, of which Apple made $250, the Japanese makers of the touch
systems and screens made $70 and smaller amo­unts were made by the
Korean and Taiwanese suppliers of the batteries, flash memory, cameras
etc. The Chinese made just about $8, mainly in terms of labour cost, to
assemble it. But the Chinese are determined to move up in the value
chain. The government is working systematically to build high-end
capabilities and intends to raise the domestic content of core
components and key materials to 40 per cent by 2020 and 70 per cent by
2025. This goes along with higher R&D expenditures of some $213
billion in 2015, equivalent to 2.1 per cent of the GDP.
One indicator of this are the Chinese acquisitions in high-tech
industries in Europe and the US, which have accelerated in the past
year. This July, Zhongwang, a state supported enterprise, bought Aleris,
a US company specialising in making roll­ed aluminium products for
aerospace and automotive industries. Earlier this year, Kuka, a German
company specialising in making robots for automobile plants, was bought
by Midea Group — China’s largest home appliance maker.
More recently, Aixtron, a German company with a long history of
making advanced tools required for making sophisticated semiconductors,
was bought by the Chinese. The Aixtron case could well point to the
problem. Last year, the German company’s share prices tumbled when a
Chinese buyer San’an Optronics cancelled a large order at the last
minute. As a result, the company went up for sale and a Chinese
investment group, Fujian Grand Chip offered to buy it in May, this year.
Mercator Institute of Chinese Studies, which tracked the issue, found
that San’an and Fujian had a common principal investor in Liu Zhendong.
Further, there was a great deal of funding through local and national
investment funds for both companies from the Chinese government that has
set aside funds to encourage a Chinese semiconductor industry.
China has an eye on US firms too, though the latter keeps a more wary
eye on them through the Committee on Foreign Investment in the US
(CIFUS) which has shot down big-ticket investments like the one for
Fairchild Semiconductors. Likewise, Beijing’s Unisplendour Co­rp
withdrew from a deal to buy a stake in Western Digital due to regulatory
pressure.
One major area to watch is the field of Artificial Intelligence (AI).
A White House assessment of AI research indicates that today China with
350 publications leads the field with the US at number two, with a
little over 250. All other players — UK, Australia, Canada, Japan,
Germany, Singapore, South Korea or France — produce a little above 50 or
a little less than that. This is not just an absolute lead — looked at
through their citations by other scholars (a measure of their influence)
indicates Chi­na remains number one. Baidu, China’s equivalent of
Google, runs a huge centre for AI research in San Jose, where its chief
scientist, Andrew Ng is also an associate professor at the Stanford
University’s co­m­puter science department. This centre employs some of
the topmost American AI researchers.
All developing countries want technology for national developm­ent.
But China has made it into a fine art. Reverse-engineered Soviet
technology kept China going till 1990s. Thereafter, as it opened up,
China made strategic acquisitions in areas like railways, power,
aerospace and automotives with a view to establish its own industries.
In this drive, China has not hesitated to undertake industrial espionage
and cyber-theft. Then, using opaque rules and regulations, the Chinese
have systematically encouraged their champions and fobbed off the
western companies and in many instances now, they have emerged as their
competitors — railways and nuclear power reactors are two prominent
examples.
But this is only the beginning, China has now taken aim in a range of
high-end fields like AI, robotics, aerospace, renewable energy,
pharmaceuticals and biotechnology and intends to be the world leader in
all of them by the time of their twin centenary — 2049, the anniversary
of the revolution.Mid Day October 25, 2016